TESTIMONY OF
PAUL V. GERLACH
ASSOCIATE DIRECTOR, DIVISION OF ENFORCEMENT
U.S. SECURITIES AND EXCHANGE COMMISSION
CONCERNING H.R. 4353,
THE INTERNATIONAL ANTI-BRIBERY AND
FAIR COMPETITION ACT OF 1998
BEFORE THE
SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS
COMMITTEE ON COMMERCE
UNITED STATES HOUSE OF REPRESENTATIVES
SEPTEMBER 10, 1998
Chairman Oxley, Congressman Manton and other Members of
the Committee:
I appreciate the opportunity to testify on behalf of
the U.S. Securities and Exchange Commission ("SEC" or
"Commission") concerning H.R. 4353, legislation to implement
the Organization for Economic Cooperation and Development
("OECD") Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions.
The Commission would like to congratulate the Committee
on holding hearings and considering legislation on this
important issue. The United States, as a signatory to the
OECD Convention, has agreed to seek approval and enactment
of implementing legislation by the end of 1998.
The Commission strongly supports the securities laws
provisions of H.R. 4353, which it believes are necessary to
implement the OECD Convention. Through the OECD Convention,
33 nations have now committed to eradicate bribery of
foreign officials in order for companies to transact
business in the international marketplace. This Convention,
which is largely consistent with existing U.S. law, the
Foreign Corrupt Practices Act ("FCPA"), is designed to level
the playing field upon which U.S. companies compete in the
international business arena and to create transparent
business practices around the world. To continue momentum
for the OECD Convention, it is important that the United
States enact implementing legislation on schedule to ensure
FCPA consistency with the Convention.
BACKGROUND OF THE FOREIGN CORRUPT PRACTICES ACT
The United States has been a world leader in combating
corruption in the global marketplace for some time. The
Commission has been -- and will continue to be -- at the
forefront of that effort. Among the statutory tools that
the SEC relies upon is the FCPA.[1] Enacted 20 years ago,
the FCPA makes illegal the payment of bribes to foreign
officials for the purpose of obtaining or retaining
business. The FCPA also created books and records and
internal controls provisions of the federal securities laws
that have been more generally used by the Commission to
combat fraud.
The problem of bribery by United States corporations
doing business abroad first surfaced during the 1970s when
the press reported allegations of questionable payments by
United States companies to foreign government officials. In
1973, several corporations and executives were charged with
using corporate funds for illegal domestic political
contributions by the Office of the Special Prosecutor of the
Department of Justice. Since the nondisclosure of these
activities might entail violations of the federal securities
laws, the Commission published a statement of the view of
the Division of Corporation Finance concerning disclosure of
these matters in public filings. This release explains that
indictments, guilty pleas, and convictions of corporations
or their officers or directors for illegal acts are
"material to an evaluation of the integrity of the
management of the corporation as it relates to the operation
of the corporation and use of corporate funds."[2]
Commission staff also discovered falsification of
corporate financial records to conceal the use of corporate
funds as well as the existence of secret "slush funds"
disbursed outside the normal financial system. The
resulting investigations culminated in settled injunctive
actions against 14 companies as of May 10, 1976.
As a result of the potential magnitude of the problem,
the Commission began a voluntary disclosure program under
which the Commission offered not to bring enforcement
actions against companies that disclosed past payments and
agreed to implement internal procedures to prevent bribery
in the future. Under the program, over 400 United States
companies, including 117 of the top Fortune 500 companies,
admitted making questionable or illegal payments in excess
of $300 million to foreign government officials.[3] The
Commission submitted a report to Congress together with a
legislative proposal.[4]
Enactment of the Foreign Corrupt Practices Act of 1977
In response to these events, Congress enacted the
Foreign Corrupt Practices Act of 1977, amending the
Securities Exchange Act of 1934 (the "Exchange Act"), and
making the United States the first government to outlaw
bribery of foreign officials. The FCPA attempts to stop
corporate bribery through three basic means:
* First, by making it illegal to bribe foreign
officials to obtain or retain business. The
Commission has civil enforcement authority over the
violation of the anti-bribery provisions by domestic
or foreign public companies whose securities are
registered with the SEC, and the Department of
Justice has both civil and criminal enforcement
authority for violations of the anti-bribery
provisions by domestic concerns, as well as for
criminal actions involving issuers. The FCPA covers
payments to foreign government officials, political
parties, party officials, political candidates, and
intermediaries (the anti-bribery provision).
Section 30A(a) of the Exchange Act (15 U.S.C. §
78dd-1(a));
* Second, by requiring companies subject to SEC
reporting requirements to keep detailed books and
records that accurately reflect corporate payments
and transactions (the books and records provision).
Section 13(b)(2)(A) of the Exchange Act (15 U.S.C. §
78m(b)(2)(A)); and
* Third, by requiring companies subject to SEC
reporting requirements to institute and maintain an
internal accounting system to assure management's
control over the company's assets (the internal
controls provision). Section 13(b)(2)(B) of the
Exchange Act (15 U.S.C. § 78m(b)(2)(B)).[5]
Subsequent Events
Critics have contended that the FCPA places American
businesses at a competitive disadvantage in the foreign
marketplace because other countries do not have similar
prohibitions against foreign bribery. This disadvantage may
mean lost opportunities for American companies in the global
marketplace, possibly affecting overseas procurements valued
in the billions of dollars each year. Indeed, some of our
trading partners have explicitly encouraged such bribes by
permitting businesses to claim them as tax-deductible
business expenses.
In 1988, in conjunction with amendments to the FCPA,
Congress sought to address the competitiveness issue. It
charged the President to negotiate an agreement with the
other OECD members requiring them to enact legislation
similar to the FCPA to combat the problems created by
bribery, and required the President to report to Congress
within one year of passage on the progress of these
negotiations. Since 1988, the United States has been urging
other countries to criminalize bribery of foreign officials
by their nationals.
The legislation at issue today is the culmination of
these efforts.
The Commission's Enforcement of the FCPA
The Commission has brought four enforcement cases
involving the anti-bribery provision of the FCPA.[6] The
Commission has also brought numerous cases enforcing the
books and records and internal controls provisions of the
FCPA. [7]
One recent case involving bribery as well as the books
and records and internal controls provisions of the FCPA is
SEC v. Triton Energy Corp. In this case, the SEC alleged
that during the years 1989 and 1990, two former senior
officers of Triton Indonesia, a subsidiary of Triton Energy,
authorized numerous improper payments to the subsidiary's
business agent who acted as an intermediary between Triton
Indonesia and Indonesian government agencies, knowing or
recklessly disregarding the high probability that the
business agent either had or would pass such payments along
to Indonesian government employees for the purpose of
influencing their decisions affecting the business of Triton
Indonesia. The two former senior officers, along with other
Triton Indonesia employees, concealed these payments by
falsely documenting and recording the transactions as
routine business expenditures. Triton Indonesia also
recorded other false entries in its books and records.
Although Triton Energy did not authorize or direct these
improper payments and misbookings, when Triton Energy's
internal auditor notified its management of the violations
in a memorandum, Triton Energy's former president ordered
that all copies of the memorandum be destroyed, and Triton
Energy's management failed to put a stop to the illicit
activities.
Without admitting or denying the allegations, Triton
Energy consented to the entry of an injunction that
permanently enjoins it from future violations of the books
and records and internal controls provisions of the FCPA,
and ordered it to pay a $300,000 penalty. The two former
senior officers each consented to the entry of an injunction
that permanently enjoins them from future violations. One
was ordered to pay a $35,000 penalty and the other to pay a
$50,000 penalty. The result in Triton makes clear that
whenever senior management becomes aware of FCPA violations,
even if it did not authorize them in the first instance, it
is liable for failure to investigate and put an end to such
violations.
OECD Convention
Since Congress' 1988 directive to the President to
engage in international efforts to combat bribery, efforts
to combat corruption have gained increasing support in the
international community. These efforts finally culminated
in the OECD Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions (the
"OECD Convention"), a treaty negotiated by the OECD and
signed by the United States and 32 other nations on December
17, 1997 in Paris.[8] The Commission has been an active
participant in this project and is pleased with the OECD
Convention.
The OECD Convention calls on all parties to make it a
criminal offense "for any person intentionally to offer,
promise or give any undue pecuniary or other advantage,
whether directly or through intermediaries, to a foreign
public official, for that official or for a third party, in
order that the official act or refrain from acting in
relation to the performance of official duties, in order to
obtain or retain business or other improper advantage in the
conduct of international business."[9] It further calls on
all parties to assert territorial jurisdiction broadly and,
where consistent with national legal and constitutional
principles, to assert nationality jurisdiction. All 33
nations pledged to seek approval of the Convention and
enactment of implementing legislation by the end of 1998.
In addition, if ratified, the OECD Convention would
facilitate cooperation among participating countries in
investigating instances of alleged bribery.
In the U.S., the OECD Convention was forwarded by the
President to the Senate in April 1998. The Senate
unanimously passed a resolution of advice and consent to
ratify the OECD Convention on July 31, 1998.[10]
Specific Provisions of H.R. 4353 as they Relate to the
Exchange Act
Although the OECD Convention is largely consistent with
existing U.S. law, the FCPA, as well as Section 30A of the
Exchange Act, would need to be amended to implement the
Convention. H.R. 4353 is designed to make the necessary
implementing changes to existing U.S. law. The conforming
changes to the Exchange Act proposed by H.R. 4353, which are
largely minor in nature, are as follows:[11]
* First, the OECD Convention bans payments made to
secure "any improper advantage". The FCPA currently
prohibits payments made "in order to obtain or
retain business". H.R. 4353 clarifies the scope of
FCPA liability to explicitly include the OECD
Convention language "securing any improper
advantage" from a foreign official. H.R. 4353
effects this change in Section 2(a) by amending
Section 30A(a) of the Exchange Act (15 U.S.C. §
78dd-1(a));
* Second, the OECD Convention includes officials of
international agencies within the definition of
"foreign public official." H.R. 4353 expands the
definition of covered "foreign official" to include
officials of public international organizations.
Section 2(b) of H.R. 4353 amends Paragraph 1 of
Section 30A(f) of the Exchange Act (15 U.S.C. §
78dd-1(f));
* Third, the OECD Convention provides for nationality
jurisdiction. H.R. 4353 conforms to the OECD
Convention by providing an additional basis for
jurisdiction over foreign bribery by U.S. issuers
and U.S. persons that are officers, directors,
employees, or agents, or stockholders of such
issuers. Accordingly, the bill will amend the FCPA
to provide for jurisdiction over the acts of U.S.
businesses and nationals in furtherance of unlawful
payments that take place outside the United States,
irrespective of whether in doing so they make any
use of the mails or means or instrumentalities of
U.S. interstate commerce. The Commission has been
advised by the Department of Justice that this
exercise of jurisdiction over U.S. businesses and
nationals for unlawful conduct abroad is consistent
with U.S. legal and constitutional principles. It
is within the constitutional grant of power to
Congress to "regulate Commerce with foreign Nations"
and to "define and punish . . . Offenses against the
Law of Nations." U.S. Const. art. I, § 8, cl. 3 &
10. Section 2(c) of H.R. 4353 amends Section 30A of
the Exchange Act (15 U.S.C. § 78dd-1) to effect this
change; and
* Fourth, the OECD Convention necessitates conforming
penalties for non-U.S. citizen employees and agents
of issuers and domestic concerns to penalties for
U.S. citizen employees and agents (which are
currently more severe). H.R. 4353 amends the
penalties applicable to employees and agents of U.S.
businesses to eliminate the current disparity
between U.S. nationals and non-U.S. nationals
employed by or acting as agents of U.S. companies.
In the current statute, foreign nationals employed
by or acting as agents of U.S. companies (as opposed
to officers or directors) are subject only to civil
penalties. The bill would eliminate this
restriction and, thereby, subject all employees or
agents of U.S. businesses to both civil and criminal
penalties. Eliminating this preferential treatment
implements the OECD Convention's requirement that
"[e]ach Party shall take such measures as may be
necessary to establish that it is a criminal offence
[sic] under its law for any person [to make unlawful
payments]."[12] Section 2(d) of H.R. 4353 amends
Section 32(c) of the Exchange Act (15 U.S.C. §
78ff(c)) to effect this change.[13]
CONCLUSION
The increasing globalization of the world's economy,
along with the establishment of capital markets in new
environments, have contributed to U.S. companies having
increased business dealings and interests abroad. As this
trend continues, the risk of U.S. companies operating in
situations where bribery of foreign officials is a normal
part of doing business increases. Accordingly, it is
important to enact, and to encourage other countries to
enact, legislation that will provide a more level playing
field for U.S. companies in the international marketplace.
The Commission has aggressively enforced the FCPA and
strongly supports the OECD Convention and the implementing
legislation as a means to provide a more level playing field
for U.S. companies abroad.
In sum, the Commission strongly supports the changes to
the securities laws contemplated by H.R. 4353.
**FOOTNOTES**
[1]: Pub. L. No. 95-213, 91 Stat. 1494 (1977), as amended by
the Omnibus Trade and
Competitiveness Act of 1988, Pub. L. No. 100-418, tit.
V, §§ 5001-03, 102 Stat. 1415 (1988) (codified as
amended at 15 U.S.C. §§ 78m, 78dd-1, 78dd-2, 78ff).
[2]: Securities Act Release No. 5466 (Mar. 8, 1974).
[3]: H.R. Rep. No. 95-640 at 4 (1977).
[4]: Securities and Exchange Commission, 94th Cong., Report
on Questionable and
Illegal Corporate Payments and Practices (Comm. Print
1976).
[5]: In addition, as a result of amendments to the FCPA in
1988, it is unlawful for any
person to knowingly circumvent or knowingly fail to
implement a system of internal accounting controls, or
to knowingly falsify any book, record, or account
described in Section 13(b)(2). See Section 13(b)(5) of
the Exchange Act (15 U.S.C. § 78m(b)(5)).
[6]: See SEC v. Triton Energy Corp., Litigation Release No.
15266 (Feb. 27,
1997) and Litigation Release No. 15396 (June 26, 1997);
SEC v. Ashland Oil, Inc., Litigation Release No. 11150
(July 8, 1986); SEC v. Sam P. Wallace Co., Litigation
Release No. 9414 (Aug. 13, 1981); and SEC v. Katy
Industries, Inc., Litigation Release No. 8519 (Aug. 30,
1978).
[7]: The Commission has brought more than 300 cases
involving the books and records
and internal controls provisions of the FCPA. See
e.g., SEC v. William Trainor, Vincent D. Celentano,
Medical Diagnostic Products, Inc. (f/k/a/ Novatek
International, Inc.), et al., Litigation Release No.
15786 (June 18, 1998) and Litigation Release No. 15844
(Aug. 12, 1998); SEC v. Charles T. Young and Selig
Adler, Litigation Release No. 15794 (June 29, 1998);
SEC v. Joseph C. Allegra, David Hersh, J. Lee Ledbetter
and H. Flynn Clyburn, Litigation Release No. 15384
(June 11, 1997); SEC v. Policy Management Systems
Corp., et al., Litigation Release No. 15417 (July 23,
1997); SEC v. Structural Dynamics Research Corp., et
al., Litigation Release No. 15325 (Apr. 10, 1997); and
SEC v. Kendall Square Research Corp., et al.,
Litigation Release No. 14895 (Apr. 29, 1996) and
Litigation Release No. 15155 (Nov. 12, 1996). Notably,
these provisions extend to all issuers who register
securities with the Commission, even foreign issuers.
See e.g., SEC v. Montedison, S.p.A., Litigation Release
No. 15164 (Nov. 21, 1996). (The complaint alleged that
Montedison, an Italian company, engaged in a scheme
designed to conceal hundreds of millions of dollars of
payments that, among other things, were used to bribe
Italian politicians and other persons. The scheme
concealed losses of at least $398 million. The
complaint alleged that as a result of the scheme,
Montedison's assets were materially overstated on its
books and records and in its financial statements for
fiscal years 1988 through 1991.)
[8]: These 33 countries include most of the significant
trading countries in the world
and consist of 28 OECD Member States and five non-OECD
Members who are participants in the OECD's Working
Group on Bribery in International Business
Transactions. At this time, Australia is the only OECD
Member State that has not signed the OECD Convention.
[9]: OECD Convention, art. 1, para. 1.
[10]: Notably, on the same day, the Senate passed by voice
vote S. 2375, its version of
implementing legislation for the Convention.
[11]: As is its general practice, the Commission is
confining its testimony to the
amendments affecting the federal securities laws.
[12]: OECD Convention, art. 1, para. 1 (emphasis supplied).
[13]: In addition, Section 4 of H.R. 4353 largely parallels
the other provisions of the
FCPA to create parity between the treatment of U.S.
nationals and foreign nationals. This change is to
conform with the OECD Convention's call on parties to
cover "any person." The current FCPA covers only
issuers covered under the Exchange Act and "domestic
concerns."